notice of assignment and loss payable clause

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Loss Payable Clause: What it is, How it Works, Example

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Investopedia / Jake Shi

What Is a Loss Payable Clause?

A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary. The loss payable provision limits the rights of the loss payee to be no higher than the rights guaranteed to the insured.

A loss payable clause might also be called a loss payee clause.

Key Takeaways

• A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary.
• The loss payee is usually registered as the recipient because it has an assignment of interest in the property being insured.
• Loss payable clauses are often used to protect lenders who have leased property or extended credit.
• They are commonly found in commercial property, auto, and maritime insurance contracts.

How a Loss Payable Clause Works

A loss payable clause indicates that a third party, referred to as the loss payee, receives funds paid for a loss. Usually, the loss payee is registered as the recipient because there is an assignment of interest in the property being insured.

Loss payable clauses are often used to protect lenders who have leased property or extended credit . They are regularly present in commercial property insurance contracts , specifically for financed properties, where the mortgage holder is the loss payee. Because a lien exists on the property, the loss payee is also known as the lien holder.

A loss payee could be a lender, lessor, buyer, property owner or any other party with interest in the insured property.

Loss payable clauses are also commonly found in personal and commercial auto policies and maritime insurance contracts.

Example of a Loss Payable Clause

When financing a vehicle purchase, the buyer must agree to carry insurance on the secured property. Usually, the financial institution (FI) making the loan will require verification of insurance coverage and insist that it is registered as the loss payee on the policy. Failure to do so could result in the lender implementing forced placed insurance .

Listing the lender as loss payee ensures that it will be compensated, regardless of potential losses. In short, it essentially functions as a safety net for the lender to reduce unpaid loans.

Since the buyer of the vehicle is not the sole owner of the collateral , claim checks will be payable to both the driver and the lender — or directly to a repair shop. In a  total loss , the lender will be paid first.

Loss Payable Clause Requirements

Insurance contracts often limit the amount of time that can pass between the occurrence of a loss and the filing of a claim. The time limitations may vary according to the type of risk covered since some losses take longer to develop.

If a loss occurs, the insured party is often required to file a claim. Should no proof of damage or loss be submitted within the allotted period, the loss payee then becomes responsible for filing the claim.

The insurer may make separate payments to the insured party and the loss payee. When payment is to the loss payee, the insurer earns the legal right to pursue and recoup funds from any third party that caused the damage. In other words, the loss payee waives its right to seek any third party damages as soon as it has been paid by the insurance carrier.

If a policyholder should cancel a policy after funds are submitted to the loss payee, the loss payee must assign the lien to the insurance carrier, to equal losses paid.

Special Considerations

The wording of the loss payable clause often details exceptions when the loss payee's concern is unprotected. These cases include fraud , misrepresentation, or intentional acts committed by the policyholder such as deliberately damaging or destroying the property.

The loss payee may also lose its protection if aware that the property, such as a vehicle, changes ownership or faces an increased risk of damage or loss. If there is a reason for the insurer to deny payment to the policyholder, then the insurer is under no obligation to submit payment to the loss payee.

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Simply Speaking (May 2020) — Insurance Assignments

May 28, 2020

Simply Speaking (May 2020)

Insurance Assignments

As security for the Obligations, the Assignor hereby grants, sells, transfers, assigns and sets over unto the Assignee, for the benefit of the Lender, a continuing, first priority security interest in and to all of the Assignor’s right, title and interest in, to and under the following property, whether now owned or existing or hereafter from time to time acquired or coming into existence:

• all insurances (including, without limitation, all certificates of entry in protection and indemnity and war risks associations or clubs) in respect of the vessel, whether heretofore, now or hereafter effected, and all renewals of or replacements for the same;
• all claims, returns of premium and other moneys and claims for moneys due and to become due under or in respect of said insurances;
• all other rights of the Assignor under or in respect of said insurances; and
• any proceeds of any of the foregoing.

What is it and what does it do?

A standard ship finance loan agreement requires that the borrower maintain certain insurances with respect to the vessel and grant the lender (or security agent/trustee on behalf of the lender) a security interest in such insurances. Typically, this is accomplished through an insurance assignment executed by the borrower/owner that grants a security interest in the insurances to the lender, as assignee, and sets out specific undertakings and perfection requirements relating to the insurances.

Why is it there and how is it relevant to shipping?

An insurance assignment is required in ship finance transactions because it helps protect the lender’s interest if there is a casualty affecting the vessel. Maritime casualties are an inherent risk in shipping, and there is always the possibility that the vessel may cause damage or be damaged or lost. The vessel is the primary collateral for a loan, and the lender will insist that it is protected in the unlikely event that the vessel causes damage or is damaged or lost.

More practically, an insurance assignment specifies what insurances are being assigned and set out how the security interest is perfected. The insurance assignment also sets out what terms the loss payable clauses endorsed onto the insurance policies include. The loss payable clauses, discussed further below, specify in what circumstances a loss payable by an insurer under a policy may be paid to the borrower/owner and in what circumstances such loss must be paid to the lender.

Why is it important (or not so important) to the lender?

Unlike many other types of collateral, security interests in insurance policies are carved out of Article 9 of the Uniform Commercial Code which governs perfection of security interests. Therefore, a so-called “UCC financing statement” does not perfect the lender’s security interest, and the lender must take other actions to protect its interests in respect of the assigned insurance policies.

The perfection of a lender’s security interest in insurances is governed by state law, and generally requires that, together with the execution of an insurance assignment, notice be provided to the insurers. Therefore, an insurance assignment will include a form notice of assignment that the borrower must execute and deliver to the insurers as part of the borrower’s obligations under the insurance assignment. As additional protection, the lender also commonly requires the insurance underwriters to execute a letter of undertaking in favor of the lender and that the lender be named as an additional insured or loss payee on the policy, as further discussed below.

How does it affect the borrower in practical terms?

The insurance assignment affects the borrower primarily by (a) restricting under what circumstances a loss payable by an insurer may be paid to the borrower/owner, and (b) by placing certain initial and ongoing obligations on the borrower/owner. Initially, among other requirements, the borrower must provide notice of the assignment to the insurers to perfect the lender’s security interest. The insurance assignment also contains (if they are not set out in the loan agreement itself) restrictions on amending the insurances and include certain ongoing lender notification requirements. The borrower must be careful not to technically default under a loan agreement by failing to comply with the ongoing insurance notification requirements and undertakings.

How is it negotiated?

Insurance assignments are a standard element of any ship finance transaction. However, specific insurance coverage requirements are frequently negotiated between the borrower and the lender. While lender insurance coverage requirements often reflect insurance coverage the borrower already maintains, in some cases the lender may require more insurance cover or different types of cover (such as protection against loss of hire) than the borrower deems necessary, and the coverage requirements are then negotiated.

Unlike loan agreements and some of the other security documents in a ship finance transaction, an insurance assignment also commonly includes obligations on third parties. Under a typical insurance assignment, the insurance underwriters must (a) execute letters of undertaking in favor of the assignee, and/or (b) endorse loss payable clauses onto their policies. The insurance underwriters are not party to the insurance assignment itself, but must agree to provide these letters of undertaking and endorse the loss payable clauses. As such, when negotiating an insurance assignment, it is typical for the letters of undertaking and the loss payable clauses to be negotiated and agreed with the insurance underwriters during the documentation stage. Many insurers have preferred form letters of undertaking and will not agree to a letter of undertaking that does not follow such insurer’s preferred form.

With respect to the loss payable clauses, the borrower and lender often negotiate the thresholds and circumstances under which a loss payable may be paid to the borrower/owner. The borrower typically seeks to increase the threshold under which the insurer is permitted to make a payment directly to the borrower/owner without the consent of the lender. Conversely, the lender seeks a lower threshold to help protect its interest in the collateral. The lender typically requires losses payable in connection with a major casualty to be paid directly to the lender or requires that the lender first consent to any such payment to the borrower/owner, but allows payment of certain amounts directly to the borrower/owner, for example to affect repairs in the case of a smaller casualty.  The threshold varies based on the value of the vessel, the anticipated size of any potential casualties, the size of the facility and the value of the other collateral securing the loan, and the financial strength of the borrower.

Related Attorneys

Lawrence Rutkowski

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Michael S. Timpone

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What Is a Loss Payable Clause?

A Loss Payee Must Have an Insurable Interest in Insured Property

A loss payee is a person or entity who's eligible to receive payment under an insurance policy if property, in which they have an interest, is damaged by a covered peril. A loss payee may be a property owner, a lender, or a seller. Loss payees are often added to commercial property policies via a standard endorsement entitled Loss Payable Provisions. The endorsement contains four clauses, each designed for a specific type of loss payee. The first two clauses are used most often. They are the Loss Payable Clause and the Lender's Loss Payable Clause.

The Loss Payable clause protects a property owner against loss or damage to the property while it's in the insured's possession. The loss payee may own all or a portion of the insured property.

For example, Fred owns Fantastic Furniture, a furniture manufacturing company. Fantastic Furniture is buying a new laser cutting machine from Lasers-R-Us. The machine costs $120,000, and Fantastic will pay the seller $40,000 per year for three years. Until the machine is paid off, both Fantastic Furniture and Lasers-R-Us will have an insurable interest in it. Fantastic has insured the machine under a commercial property policy. The sales agreement requires Fantastic to include Lasers-R-Us as a loss payee under Fantastic's property policy.

The Loss Payable Clause does not give the loss payee the rights that are afforded by the Lender's Loss Payable Clause.

At Fred's request, Fantastic's insurer adds the Loss Payable Provisions endorsement to the company's property policy. The insurer includes Lasers-R-Us' name and address as well as a description of the laser machine in the endorsement schedule. If a fire breaks out in Fantastic's factory and the laser machine is destroyed, Fantastic's insurer will pay for the loss to Fantastic and Lasers-R-Us jointly, as their interest may appear.   This means that either or both parties will be compensated for a loss based on their insurable interest in the insured property.

If Fantastic owns 30% of the machine at the time of the loss, its share of the insurance payment should be $36,000 (not counting the deductible). Lasers-R-Us' share should be $84,000. The insurer may pay the entire $120,000 to both parties jointly.

How Does a Lender's Loss Payable Clause Work?

The Lender's Loss Payable Clause is used to cover a creditor whose interest in insured property is stated in a written document such as a mortgage, warehouse receipt, or bill of lading.   For example, suppose that Fred (in the previous example) decides to pay Lasers-R-Us the full purchase price of the laser machine upfront. Fred finances the purchase by obtaining a $120,000 business loan from the Benevolent Bank. The loan is secured by the laser machine.

Under the Lender's Loss Payable Clause, the insurer will make a loss payment directly to the lender if property in which the lender has an interest is damaged by a covered peril.

As a condition of the loan, Fantastic must insure the bank as a loss payee under the Lender's Loss Payable Clause. This clause protects the lender in three important ways.

Foreclosure Action

First, the Lender's Loss Payable Clause ensures that the loss payee can receive payment for a loss even if it has initiated a foreclosure action on the covered property. For example, suppose Fantastic Furniture has missed several payments on its business loan so the Benevolent Bank begins foreclosure proceedings. Two days later, the laser cutting machine is destroyed by a windstorm. The bank is entitled to receive payment for the loss of the machine under Fantastic's property policy even though it has foreclosed on the loan.

Acts Committed by the Insured

Secondly, the Lender's Loss Payable Clause protects the lender in the event the insured commits certain acts that cause the insurer to deny its claim. The lender retains its right to receive loss payments even if the insured's claim has been denied, say because the insured has failed to comply with the terms of the policy.

For example, suppose that the laser cutting machine has been destroyed by a fire at Fantastic Furniture's manufacturing plant. At the time of the fire, Fantastic has paid off half of its loan to the Benevolent Bank. Fantastic files a claim for its share of the loss. However, the insurer denies Fantastic's claim because Fred refuses to provide a proof of loss or to communicate with the adjuster.

The Benevolent Bank can still receive compensation for its share of the loss if it pays any outstanding premium (if any is due) and submits a signed, sworn proof of loss (since Fred hasn't submitted one). The lender must also notify the insurer if the ownership of the insured property has changed (such as the loss payee has repossessed the property).

Cancellation

A third protection provided to the lender under the Lender's Loss Payable Clause is notification if the insurer cancels or non-renews the policy. If the insured has failed to pay the premium, the insurer will provide 10 days' notice that it intends to cancel the policy for nonpayment. The insurer will provide 30 days' notice if it cancels the policy for any other reason. If the insurer decides to non-renew the policy, it will notify the loss payee 10 days before the policy expires.  

North Star Mutual. " Loss Payable Provisions ," Page 2. Accessed June 29, 2020.

Colony Insurance. " Common Policy Conditions ." Accessed July 14, 2020.

Assignment of insurance policies and claims | Practical Law

Assignment of insurance policies and claims

Practical law uk practice note w-031-6021  (approx. 19 pages).

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What is a Loss Payable Clause?

Insurance is frequently a minefield of confusion and uncertainty, saddling people with contracts that they may not fully comprehend at no fault of their own. One of these mind-boggling attributes is the loss payable clause. To learn more about loss payable clauses and what they mean for you and your family, reach out to a San Diego insurance attorney from Dawson & Rosenthal today. 

Loss Payable Clauses Explained

A loss payable clause , sometimes referred to as a loss payee clause, is a part of a contract that pays insurance out to a third party rather than the beneficiary party listed on the insurance plan. This third party is referred to as the “loss payee” in this circumstance and is given this status as there is an assignment of interest on whatever is being insured. 

This type of clause is most often included in a policy in which the insured property is subject to a security interest, such as a mortgage. One of the most common areas of insurance that includes loss payable clauses is maritime insurance, although it is commonly found in personal and commercial automobile contracts. 

Why Loss Payee Clauses Are Included in Insurance Contracts

The function of a loss payable clause is to protect the lending party. This is due to the risk taken by the lender in the case that their property is damaged or lost during its use as the loss payee has vested interest in the property. In most cases, the mortgagee (usually the bank) requires such a clause to be amended to the end of a contract. The loss payee is normally the owner of the property and is also known as the “lien holder” due to the existence of a lien on the property. 

With the lender’s presence as a loss payee, the arrangement ensures that they will be compensated even in the case of damage or loss of the property. It is a safety mechanism for the lender to diminish unpaid loans. 

Insurance Policy Clauses in Context

One such example is that of a loss payable clause on a car insurance contract. In the case of an accident with another car, both the owner of the car and the loss payee (the lender) may receive insurance checks. The individual harmed in the accident would receive compensation for medical bills, while the loss payee will receive the money needed to repair or replace the damaged property. 

Certain clause requirements and special considerations apply to loss payable clauses as well. Time limitations between the occurrence of a loss on the property and claim filing, the requirement to file a claim, cancellation of a policy, exceptions to the loss of a payee’s unprotected concern, and more are important to keep in mind when becoming a party in a contract with a loss payee clause. 

Dawson & Rosenthal, Working for the San Diego Community

The implications of such a clause on someone’s policy can be confusing and oftentimes requires the help of an educated and experienced lawyer. Reach out to a San Diego bad faith insurance attorney today from Dawson & Rosenthal, P.C. by calling (619) 354-1652 to learn more. 

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Learn About Notice of Assignment for Invoice Factoring

In a  factoring  relationship, you agree to assign your selected receivables to the factoring company. By advancing your  cash  against your invoices, the factor has purchased the right to collect amounts due from your customers. The Notice of Assignment is a critical part of your factoring paperwork as it reflects the change in invoice ownership.

What is a Notice of Assignment?

The Notice of Assignment is a simple letter the factoring company sends to your customers whose invoices you are factoring. In writing, the notice informs your customers that the accounts receivable is assigned, and future payments should be made payable to the factoring company. The notice will also include a remittance address so your customer can change their payment information.

The Notice of Assignment legally explains to your customers that any payments they make to you instead of the factor will not satisfy their obligation. The factoring company may hold your customers liable for misdirected amounts. This may occur if your customers choose to ignore the notice or fail to update payment information.

Many factors will require your customers to sign and return a copy of the notice to acknowledge receipt. This is not always required, though. Instead, the Notice of Assignment may include language that considers your customer’s continued use of your services to constitute an agreement to the notice. In addition, the factor may only revoke a Notice of Assignment if they send a signed and notarized release notification to your customers. They will do so if you choose not to factor that account any longer or you end your factoring relationship. In either case, the account must have no outstanding balance.

What Programs Don’t Use a Notice of Assignment?

Financing programs that do not use a notice of assignment include non-notification factoring and sales ledger financing.

Non-notification factoring is similar to regular factoring, but with a few key differences. Instead of sending a conventional Notice of Assignment to customers, the factoring company informs them of a new payment address using the company’s regular letterhead. This allows the customer to still send payments to the new address without being aware that it belongs to the factor. To qualify for non-notification factoring, companies typically need to have monthly revenues of at least $300,000, a track record of over a year, reliable financial reports, and no serious financial difficulties.

Sales ledger financing operates like a line of credit based on outstanding receivables. Companies can access up to 90% of their outstanding receivables at any given time without the need to submit a factoring schedule of accounts for each transaction. Although the finance company still handles payments, the customer does not receive a Notice of Assignment. Instead, they receive a letter indicating a change in the payment address. Sales ledger financing offers greater flexibility compared to non-notification factoring, with daily rates allowing for better cost control. The qualification requirements for sales ledger financing usually include monthly revenues of at least $300,000, a track record of 1-2 years, reliable financial reports, good receivables management systems, and no serious financial difficulties.

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Why do Factoring Companies Notify Your Customers?

The Notice of Assignment is a vital form of protection for a factoring company. It protects the factor in case the  business owner  (the factor’s client) receives the payment instead of the factoring company.

In a best-case scenario, the notice serves to inform every party in a factoring transaction of their rights and responsibilities. It also gives your customer the appropriate address to make account payments, allowing your factoring relationship to continue smoothly.

In a worst-case scenario, a factor can recover unpaid amounts from your customer should they continuously pay over notice or not pay at all. A Notice of Assignment is evidence in any legal proceeding — from a demand letter for payment to a full-fledged lawsuit — that asserts the factor’s standing and rights to payment.

What Will Your Customers Think?

Customers may have concerns or questions when they receive a letter regarding the use of invoice factoring. It’s understandable that they may be unsure or unfamiliar with this financing tool. As a business owner, it’s important to address these concerns and communicate with your customers effectively.

First and foremost, it’s essential to acknowledge that invoice factoring is a common practice utilized by many small and midsize companies to finance their operations and facilitate growth. Chances are, your customers are already aware of this financing method and how it works.

When discussing invoice factoring with your customers, emphasize the benefits it provides to them. By using factoring, you can offer them extended payment terms, such as 30- to 60-day terms, while still ensuring excellent service. This enables your customers to utilize their available cash resources more effectively. Without factoring, providing extended payment terms might be challenging, especially for businesses experiencing growth.

It’s crucial to assure your customers that little is changing in terms of the services and support your company provides. Reassure them that they will still have the same level of communication and engagement with you and your employees as before. Highlight that despite factoring being implemented, your commitment to their satisfaction remains unchanged.

Address the misconception that factoring indicates financial trouble within your company. Remind your customers that factoring is a versatile tool used to achieve various goals and objectives, just like other forms of financing such as loans or lines of credit. Factoring simply serves to smooth out your cash flow and support your business’s overall financial stability and growth.

Overall, open communication with your customers is key. Provide them with transparency and reassurance, explaining the benefits of factoring and emphasizing that it is a common and established financing practice. By effectively addressing their concerns, you can foster trust and maintain strong relationships with your valued customers.

Why a Notice of Assignment Matters To You

You will receive a copy of the Notice of Assignment that the factor sends to your customers. While the notice is to inform your customers, it also has an important implication for you as well.

As your  factoring agreement  explains, payments your company receives from your customers over notice are payable to the factoring company. Even in the smoothest transition, you may receive payments sent before receipt of the notice or released before your customers’ updated their payment system. There will likely be a provision explaining the procedure for sending misdirected payments to the factor in these cases. Misdirected payments are usually sent by overnight check or via bank transfer.

However, you may be responsible for additional penalties and fees if your customers continue to pay over notice, and you deposit those payments into your account. In addition, you may end up owing more, depending on fee structure, due to the extra time it takes for the factor to receive payment. Some factors include a misdirected payment fee in the  factoring agreement  that you will have to pay if you fail to return misdirected payments to the factor. Therefore, fees may be higher if you are responsible for the misdirection.

As with any legal document, be sure to be fully aware of the language used within the Notice of Assignment. Be mindful of your customers’ responsiveness to the notice. Take action immediately if you realize that any of your customers are not sending their payments on time. This transparency solidifies your factoring relationship, builds trust with your factor, and protects your interests.

What if the Payment is for an Invoice I Didn’t Factor?

When you assign your customers’ receivables to your factoring company, you agree to direct all payments to the factor, even for invoices that you did not factor. This eliminates complications for all parties and ensures that the factoring company receives every payment they should. Without an all-inclusive assignment, your customers would receive a notification every single time you factor an invoice. They would have to retain two addresses on file, increasing the likelihood of misdirected payments.

Your factoring company will have a straightforward procedure in place to address non-factored payments. This may include applying those payments to open invoices and sending you the difference or the total amount in a regularly scheduled reserve release. Stay prepared by asking your factor about their policies surrounding non-factored payments.

Factor Finders can help you find the right factoring company  for your  invoice factoring  needs.  Contact us  to learn more about our factoring services for every industry and to get started today.

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A growing number of shipowners are driven towards financing and mortgage this day as the shipping industry becoming more capital-intensive with bigger and newer ships being built. A security assignment of the shipowner’s rights under the ship’s insurance will generally be demanded by the financer for the protection of his interest.

I.     Reasons for insurance assignment

After a ship mortgage is established, the assured is still the shipowner, not the mortgagee who may find himself with little recourse when suffering from property damages and losses. As Marine Insurance Act 1906 provides that a marine policy is assignable unless it contains terms expressly prohibiting assignment.

Therefore, to obtain control over cash flow and to demand payment directly from the insurer without being interfered by the shipowner or any third party in the event of shipowner default, the mortgagee will normally require an assignment of insurance transferring the right of claiming insurance proceeds. Such assignment allows the mortgagee to safeguard his interest without actually paying the insurance premium or shifting the insurance contractor.

II.  How do assignments work?

The practice is more common in the case of hull and machinery insurance than in P&I insurance, as P&I Clubs provide cover to shipowners for third-party liabilities and liability to the mortgagee is not one of them. Usually, only an assignment of payment is acceptable for P&I insurers and it is completed through the following steps.

First, the mortgagee and his lawyer will draft and issue a Notice of Insurance Assignment (see Part III.) to inform the P&I Club of the established ship mortgage and the transfer of interest.

Second, the Club will issue a draft Letter of Undertaking (LOU, see Part III.) and a Loss Payable Clause attached to the policy after confirming that cover on the entered vessel will not be terminated due to the mortgage.

Upon receipt of the draft LOU, some mortgagees will request modification as per their requirements. A formal LOU with a Loss Payable Clause incorporated in the policy will then be signed upon agreement of both parties, giving the mortgagee entitlement to payment when the owner is in default.

III.   Document templates involved in an assignment of insurance

1.        Notice of Insurance Assignment

We, (Owners Name) of (Owners address), the owner of (Ship’s Name) Hereby GIVE NOTICE that by a security deed dated (the date / month / year) and entered into by us with (the lenders name), there has been assigned by us to the lender as mortgagee of the said ship all insurances in respect thereof, including the insurances constituted by the Policy whereon this notice is endorsed. This notice to you may not be withdrawn or revoked without the prior consent of the lender.

2.        Loss Payable Clause

Payment of any recovery the Owner is entitled to make out of the funds of the Association in respect of any liability, costs or expenses incurred by it shall be made to the Owner or to its order unless and until the Association receives notice from (the “Mortgagee”) that the Owner is in default under the mortgage of the vessel in favor of the mortgagee, in which event all recoveries shall thereafter be paid to the Mortgagee for distribution by it to itself and/or to Mortgagee’s order provided always that no liability whatsoever shall attach to the Association, its Managers or their agents for failure to comply with the latter obligation until after the expiry of two clear business days from the receipt of such notice.

The Association shall, unless it receives from Mortgagee notice to the contrary, be at liberty at the request of the Owner to provide bail or other security to prevent the arrest or obtain the release of the vessel, without liability to the Mortgagee.

3.        Letter of Undertaking

We note you have taken an assignment of the insurance on the above vessel. So far as this Association is concerned, the Managers do not consent to such assignment, other than to give efficacy to the Loss Payable Clause set out below;

We do confirm however that such vessel is entered in this Association for Protection and Indemnity risks on the terms and conditions set out or to be set out in the Certificate of Entry. Furthermore, in consideration of your agreeing to the entry or continuing entry of the vessel in this Association, the Managers agree:

(a) that the Owner, i.e. the captioned Assured shall not cease to be insured by the Association in respect of that vessel by reason of such assignment; and

(b) that, notwithstanding that the vessel has been mortgaged to you and that no undertaking or guarantee has been given to the Association to pay all contributions due in respect of such vessel, the Owner does not cease to be insured.

The Association undertakes:

(a) to inform you if the Association gives the Owner of the above vessel notice that its insurance in the Association in respect of such vessel is to cease;

(b) to give 14 days’ notice of the Association intention to cancel the insurance of the Owner by reason of his failure to pay when due and demanded any sum due from him to the Association; and

(c) to advise you promptly if the vessel ceases to be entered in the Association.

IV.   Important considerations

Not all rights of the shipowner under P&I insurance is assignable. The Club has expressly stated in the LOU that it does not consent to such assignment as it covers mainly third-party liabilities – namely risks of oil spills and pollution, cargo damage, personal safety and wreck removal. The Club will reimburse the shipowner for the payment he has made in accordance with the Club Rule. For a mortgagee, he will not benefit directly from the assignment in most cases, but will be guaranteed of the vessel’s normal operation.

The mortgagee shall provide prompt notice to the Club. Despite the anti-assignment clause in insurance policies, the Club, following proper procedures, will not prevent the mortgagee from its entitled compensation if the owner fails to comply with its obligations. As stipulated in the Loss Payable Clause, the Club will make payment to the mortgagee only if it is notified in written form.

Not all ship financers need the assignment. For a mortgagee, he is not required to pay the premium because the mortgagor is still the legal owner of the entered vessel and the assured recognized by the Club. Then he will need the assignment to secure his right and benefits. But under the finance lease scenario where the leasing company is the legal owner and the bareboat charterer is the operator, it will be more reasonable for the lessor and the lessee to share the premium as co-insurers. They will both be provided with coverage and an assignment will not be necessary.

References:

Pan Zhanjun. (2015). Ship Financing

Marine Insurance Act 1906

Yang Liangyi. (2003). Ship Financing and Mortgage

The views and opinions expressed here are those of the authors and do not necessarily reflect CPI’s position. For further consultation, please contact your manager at the Club.